Debit & Credit Card Discussion

[makryger]

Barnabas, I'm curious to get your opinion on all of these sites that endorse getting credit card after credit card in order to maximize sign up bonuses? It seems like, for the consumer, there is no down side- it appears to help your credit in the long term, while earning you free trips. I just keep thinking about the age old saying "if it sounds too good to be true, it probably is". I keep looking for the "catch"... how could the credit card companies still allow this?

[barnabas1969]

Here's what Credit Karma has to say about this (from https://www.creditkarma.com/shop/credit ... n-up-bonus):

Sign-up bonus credit cards offer a great way to earn rewards as soon as you become a card member. Most rewards cards let you start earning a percentage of cash back or a couple of airline miles for each dollar you spend. Sign-up bonus credit cards do the same, but also give you a big payout early on if you reach a spending threshold in the first few months. These cards are great, if used wisely. Since many sign-up bonus credit cards come with a spending threshold in order for you to get the bonus, opening a new card can lead to an initial burst in spending. Unless you're prepared to pay off that new credit card balance quickly, it's best to wait to get one of these cards. Carrying a balance can quickly offset the sign-up bonus if you end up paying more in interest.

I'll also add that there are a few ways that it can hurt your credit score:

1) If you have too much available credit (total available credit of all credit lines).
2) If you use more than 30% of your total available credit in any month.
3) If you have too many newly opened credit lines.

So, I wouldn't recommend opening a bunch of new cards to get the bonus rewards, but one or two won't hurt as long as you don't fall into #1 or #2 above.

[makryger]

I've always heard that having a high credit utilization ratio is a bad thing (ie #2), but I'm surprised that having too much credit is a bad thing.

[barnabas1969]

Yep, but it doesn't hurt much. As an example, I have a friend (actually had... he died about a year ago when he was taking a walk with his neighbor and was run over by a drunk driver) who refinanced his house. He had great credit. His score was in the low 800's. His mortgage lender told him that if he closed a few of his cards, that his score would go up 15-20 points... because he had around $50K in available credit.

Basically, if you have so much available credit that you could run up more debt than you can afford to repay, then that's a risk factor.

[blueiedgod]

I am all for Credit card use.

1) It is not your money. If someone steals any identity, credit card numbers, they are playing with Bank's money. With Debit cards, it is your money, and until you can prove that it wasn't you, they money is not available to you.

2) Cashback!!!! Between special cashback offers from Discover, AMEX, Amazon, and such, we easily clear $2000 - $3000 a year in FREE cashback.

[barnabas1969]

It is not your money.

That mattered (a little) back when banks paid a decent interest rate on your savings and/or money market account.

until you can prove that it wasn't you, they money is not available to you.

Not true. Without any proof at all, the bank will refund your money immediately. The burden of proof is on the merchant, not you. If the merchant can't prove that it was actually YOU who did the transaction (even if you really did), you get to keep the refund. If, on the other hand, the merchant proves that it was you (which is practically impossible with online purchases), the refund is taken away from you. The system is geared to benefit the consumer, and assumes that the consumer won't fraudulently dispute a transaction (which is why online retailers don't go belly-up from a ton of fraudulent disputes).

To give an example, my ex-wife once purchased a bunch of clothing over the phone with a debit card. She (fraudulently) claimed that she never received the package, and got a full refund. The merchant was out of luck, even though the UPS driver noted that he left the package at our front door. To add more info, my ex-wife actually hid and pretended that she wasn't home so that the UPS driver would leave the package outside so that she could claim that someone must have stolen it. Another good reason why she's my EX-wife.

Cashback!!!! Between special cashback offers from Discover, AMEX, Amazon, and such, we easily clear $2000 - $3000 a year in FREE cashback.

Plenty of debit cards offer cash back too. Those are the "rewards" programs I was talking about earlier.

[makryger]

Cashback!!!! Between special cashback offers from Discover, AMEX, Amazon, and such, we easily clear $2000 - $3000 a year in FREE cashback.

Plenty of debit cards offer cash back too. Those are the "rewards" programs I was talking about earlier.

Not nearly as good as credit cards, though

[barnabas1969]

Not nearly as good as credit cards, though

Can you cite some examples of the best credit card rewards? I'll be happy to try and find equivalent (or better) debit card rewards.

Oh... and I'm not talking about "teasers" or anything short-term with some minimum purchase amount which must be satisfied within a short period of time. I'm talking about rewards which don't go away after 3-6 months, and don't require a minimum purchase amount before you qualify.

Facts, please! Please understand that short-term cash-back programs which require a minimum purchase amount (and especially those that require that it be within a short window of time like 3-6 months) are really designed to get you to carry a balance on the card. VERY FEW people actually meet the requirements for the cash back on those teaser cards, and even fewer pay off the balance before interest accrues.

A cash back "reward" of 3% hardly justifies interest charges of 20-something-percent, or even any percentage rate above 3-12%, depending on the period within which you are expected to meet the minimum purchase requirement. Think of it like this... you charge $2000-6000 over a 3-month period, and you get 3% "cash back" (equivalent to $60-180 if you're never late, if you never exceed your credit limit, if you pay the entire balance by the end of the period, if the moon is blue on Tuesday...), but you pay 12% interest on that balance (if you're lucky). So, now you are paying $20-60 per month on that balance. If you don't pay it back within 3 months (or whatever crazy terms they put in the disclosure, which nobody reads), the lender made money, and you lost!

The banks don't design these programs out of the goodness of their hearts. They are not in the business to lose money. They design them to "hook" you. The old saying is that a sucker is born every minute. The truth is that a sucker is born every second (or even faster).

P.S. I program rewards for debit and credit cards (meaning that I set-up the programs which calculate the rewards, and I do this for many financial institutions). So, be careful!!!

P.P.S. You would be amazed at how many people pay soooo much money to their banks who offered such "great deals"!!! When you get to see lots of people's bank statements, financial reports, and income totals... you get to see the real picture. I'm not crazy. Trust me.

[barnabas1969]

I should add a disclaimer to what I wrote above... by and large, the small credit unions in the USA will screw you a lot less than the banks. I emphasize "small" because some credit unions in the US are becoming quite large these days... and they are becoming more and more (profit-driven) like banks every day. Small credit unions won't usually offer all of the convenience and services that large banks can, but they'll also pay you more for your savings, charge you less for your loans, and won't gouge you quite as much. All, large and small, seem to be looking for ways to make money these days... but the smallest ones aren't nearly as bad.

Oh... and many small credit unions pay rewards for credit AND debit cards... without any crazy minimum purchase/time requirements. Some of them actually realize that they are making money on your (signature, non-PIN) purchases, and want to encourage you to do so.

Off the top of my head, I can think of one credit union (with branches all over the world) which caters to people who work in the oil industry (and related fields) and gives some darn good rates & rewards on debit/credit cards (and loans too). I can't give you a name, but if you've ever paid close attention to a gasoline pump in the USA... you've seen their name printed on it.

Ivy league schools... ever worked for one, or attended one? They have some awesome credit unions too.

There are many, many more small credit unions with great lending rates and other perks. Most people in the US can join one. You might be surprised.

I'm a member of a small credit union because they have AMAZING rates on Health Savings Accounts (HSA), and gave me a very good rate on my car loan. But, for my primary checking... I stick with Bank of America... because their debit card works everywhere, they have 24-hour service for their debit card (to report those pesky disputes), branches everywhere (to get a new card TODAY, practically anywhere in the USA), and no fees on the account if you know how to use it.

[adam1991]

Pentagon Federal Credit Union has a reward VISA; it used to give 1% (hmmm, as I recall) cash back on everything but gas, and 5% on gas.

They stripped the 1% down to 0.25%, but they kept the 5% on gas. So, I now use my Costco Amex (reward card) for everything instead--that is, everything but gas. I keep the Penfed card around just for gas and for places that don't take Amex.

BUT: the best part about the Penfed card is, the cash back is automatically credited to my account in full every month. I don't have to do a thing, and I don't have to wait to the end of the year. Every other reward card I've seen has hoops to jump through of some kind (Discover makes you accrue monies to a certain level and then take them out in discrete chunks by logging into your account, for example, and the Costco Amex sends you a voucher that you have to drive to Costco to cash in).

So every time I buy gas, it's actually 5% cheaper than what the pump says. And I don't have to put any money out of pocket to get that 5% cheaper price and then wait to be reimbursed. THAT'S a credit card worth having. Had that been a debit card, the money would come out of my account immediately.

Credit cards rule. That some people want debit cards because they can't help themselves and with a credit card would charge themselves into oblivion, is their problem. Credit cards are still a better choice, because you get to use OPM--other people's money. And that's what makes the world go 'round. OPM. Wall Street crooked fatcats got to where they are today by using OPM.

As for Bank of America having "branches everywhere", not at all. Maybe you should inspect that a little better. I live in a big metro area, and the closest one is 150 miles away. Exactly one, too.

[makryger]

Not nearly as good as credit cards, though

Can you cite some examples of the best credit card rewards? I'll be happy to try and find equivalent (or better) debit card rewards.

Like all theories, you must first start with assumptions. You assume that one will carry a balance on their credit card, have a 15% interest rate, and waste all their money. As you say, that may be true for the majority.. I'm not sure of the statistics. But in my case, you can change your assumption to that I always pay my card in full every month, I know how much I can afford, and I *always* get the sign up bonus, without having to spend extra on stuff i wasn't planning on spending.

So, for example, I just got a Chase Ink card. 60k signup bonus. That's the equivalent of $600 at the very least, $720 if you book a flight through their portal, and thousands of dollars if you convert to airline points and book reward tickets wisely. Tell me how long it would take to earn that much of a bonus on the best of debit card rewards?

Then there's the regular % back: 5% back on all office purchases. 1% back additional on staples. I go to staples, buy any gift card to restaurants we already eat at, southwest gift cards for the upcoming trip we're planning, if were on our way to the tj maxx... so basically 6% back on 80% of purchases. (I also have a Chase freedom, where I stock up on gas station and grocery gift cards during the proper months for 5% back).

Now, Mr. "Facts Please", you show me a better debit card?

[STC]

^ mak, taking things off on a small tangent, would you agree that CC Companies MUST sustain their livelihoods not only from the transaction fees, but mostly on interest from late/minimum payment payees.

Your incentives are paid for by the people that cannot afford credit cards and pay late, borrowing money, accruing interest. PLUS as I said before, everything we pay for costs more because of credit cards. It's quite amazing how the CC companies have us wrapped around their pinkies.

I have several business credit cards as I have to, there is usually no other option paying for stock. Naturally I pay off the balance ASAP, there's no way I'd pay them interest.

[makryger]

^ mak, taking things off on a small tangent, would you agree that CCs MUST sustain their livelihoods not only from the transaction fees, but mostly on interest from late/minimum payment payees.

Your incentives are paid for by the people that cannot afford credit cards and pay late, borrowing money, accruing interest. PLUS as I said before, everything we pay for costs more because of credit cards. It's quite amazing how the CC companies have us wrapped around their pinkies.

I have several business credit cards as I have to, there is usually no other option paying for stock. Naturally I pay off the balance ASAP, there's no way I'd pay them interest.

Yes, I would agree with you there. I generally am not familiar with how much of the profits is from interest on balances, and how much is on transaction fees. But obviously, everything exists to make a profit. I suppose you could phrase it that my incentives are paid for by those who cannot afford credit cards... but you could also phrase it as-- credit card companies expect a profit from giving someone a credit card, so they use bonuses to lure you in to get one. I'd imagine these bonuses would not exist if people were good at paying off their debt. There's probably also a competition component to it as well- all these different banks try to one-up eachother with the best incentives, so that the consumers are using their card, and racking up debt with them instead of others.

But ultimately, the bonuses do exist, and the cashback offers exist too, so I may as well use them, even if I'm not someone who only pays the minimum each month.

[adam1991]

Awhile back, the CC companies decided they weren't making enough money from swipe fees and from the stupid people who carry balances. So, greedy bastards that they are, they decided to try to reinstate yearly fees.

Fortunately, the market was crowded enough that that effort didn't gain a whole lot of steam.

That rewards VISA card that I carry did decide to charge a $25 annual fee; however, I did the math on that 5% instant (!) cash back on gas, and for my situation the $25 is a drop in the bucket compared to the 5% cash back.

YMMV. Every situation is different, and they're just trying to get you to use it in the HOPES that they can lure you into acting stupidly.

I think both my mortgage company and Discover send out annual Christmas cards saying "feel free to skip a payment this Christmas!" Yeah, right.

[STC]

I totally understand the can't beat 'em join 'em philosophy, but as long as you're aware they have leached the money already from you, and you're just getting a bit of it back.

[makryger]

I totally understand the can't beat 'em join 'em philosophy, but as long as you're aware they have leached the money already from you, and you're just getting a bit of it back.

Yes, I understand. It's most evident in some gas stations that charge ten extra cents per dollar for credit card payments. But in most other shops, the price of goods is going to be the same whether I use my credit card or not. Now if *everyone* suddenly stopped using them, then maybe they'd stop building the transaction fee into the price of goods, but that's not going to happen.

The other point is that there is the factor of convenience that makes people willing to use a debit card or credit card over straight cash.

[adam1991]

You know, it's not "convenience". It's the same argument against using debit cards: once they have your money (and they do, a debit card is an INSTANTANEOUS TRANSFER card), there is no incentive for them to give it back and every incentive for them to put roadblocks in the way of your getting it back.

But again a credit card is different. Chargeback? Absolutely. You try to screw me over by selling me goods not suitable for the intent for which they were sold (that's the basis of a "warranty of merchantability"), and if you won't make me whole I'll just let the credit card company deal with you. Good luck. In the meantime, it's not money out of my pocket at all.

Before anyone takes me to mean using chargeback as an every day financial/money management tool, I'm not saying that. But it's a level of protection built into the credit card system that by design inherently gives everyone some time to sort things out before an accounting of money is due. Debit cards with their instantaneous transfer from your bank account are different.

So yeah, I pay for that when I use a credit card. (We all pay for me to have that privilege.) I know that.

[STC]

...But in most other shops, the price of goods is going to be the same whether I use my credit card or not....

Yes yes of course, but the price is inflated to cover the use of credit cards whether you pay with a cc or not.
Cash and debit payments pay for credit cards too. The base price is already on average +2% to cover the (extortionate) transaction fee presented to the seller for using them.

This is the paradox of a credit card world.

[adam1991]

Therefore, if you're paying for the service--and for everything it provides above and beyond cash and debit cards--then you might as well use the service.

[STC]

Naturally

But don't expect the freebies to be really 'free'. As the buyer you've already paid them many more times the amount you get back in everything you have ever purchased.

If CC's did not exist, overall we would actually be richer.